Lease modifications under IFRS 16

Leases change all the time: tenants extend, give back a floor, renegotiate rent. IFRS 16 has specific rules for these changes, and getting them wrong misstates both the liability and the asset. This guide sets out the three outcomes and works through an extension in full.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

A lease modification is a change in the scope of a lease, or its consideration, that was not part of the original terms. Under IFRS 16 it is a separate lease if it adds the right to use more assets at a price commensurate with their stand-alone price. Otherwise the lessee remeasures the lease liability at the modification date, using a revised discount rate, and adjusts the right-of-use asset; for a decrease in scope it also recognises a gain or loss on the part terminated.

At a glance

Separate lease if
More assets, at a stand-alone price
Otherwise
Remeasure the liability
Discount rate
Revised, at the modification date
Extension
Adjust the asset by the remeasurement
Decrease in scope
Partial derecognition, gain or loss
Excel
Lease calculator
Lease modifications under IFRS 16Separate lease if: More assets, at a stand-alone price; Otherwise: Remeasure the liability; Discount rate: Revised, at the modification date; Extension: Adjust the asset by the remeasurement; Decrease in scope: Partial derecognition, gain or loss; Excel: Lease calculator.KEY FACTS AT A GLANCELease modifications under IFRS 16Separate lease ifMore assets, at astand-alone priceOtherwiseRemeasure the liabilityDiscount rateRevised, at themodification dateExtensionAdjust the asset by theremeasurementDecrease in scopePartial derecognition,gain or lossExcelLease calculatorChecked against official sourcesTax BakersLease modifications under IFRS 16Separate lease if: More assets, at a stand-alone price; Otherwise: Remeasure the liability; Discount rate: Revised, at the modification date; Extension: Adjust the asset by the remeasurement; Decrease in scope: Partial derecognition, gain or loss; Excel: Lease calculator.KEY FACTS AT A GLANCELease modifications under IFRS 16Separate lease ifMore assets, at a stand-alone priceOtherwiseRemeasure the liabilityDiscount rateRevised, at the modification dateExtensionAdjust the asset by the remeasurementDecrease in scopePartial derecognition, gain or lossExcelLease calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What counts as a modification?

A change to the lease that was not part of its original terms: adding or ending the right to use assets, extending or shortening the term, or changing the payments. Exercising an option that was already in the contract is not a modification; it is a reassessment of the lease term. See lease term and options.

What are the possible outcomes?

Type of changeAccounting
Adds the right to use one or more extra assets, for a price that reflects their stand-alone priceA separate new lease; the original lease is unchanged
Decreases the scope, such as giving up part of the space or shortening the termReduce the asset in proportion, recognise a gain or loss, then remeasure the remaining liability at a revised rate
Any other change, such as extending the term or changing the paymentsRemeasure the liability at a revised rate and adjust the asset by the same amount

A worked example: extending a lease

A company has a five-year office lease at CU 100,000 a year, paid in arrears, discounted at 5%. At the end of year 3, with two years left, it agrees with the landlord to extend the lease by three years at the same rent. The extension was not an option in the original contract, so it is a modification. The company's incremental borrowing rate is now 6%.

StepCU
Lease liability at the end of year 3, before the change185,941
Right-of-use asset at the end of year 3 (432,948 less three years of depreciation)173,179
Remeasured liability: five payments of CU 100,000 at 6%421,236
Increase in the liability, added to the asset235,295
Right-of-use asset after the change408,474
New annual depreciation over the five remaining years81,695

The entry is: Dr Right-of-use asset CU 235,295, Cr Lease liability CU 235,295. No gain or loss arises, because the change increases the lease. The modification sheet in the Lease calculator (Excel) performs this calculation for any extension or change in payments.

How is a decrease in scope handled?

Suppose instead the tenant gives up half its floor space with two years left. It reduces the carrying amount of the asset by half and the liability by half, and recognises the difference as a gain or loss. It then remeasures the remaining liability for the new payments at the revised rate and adjusts the remaining asset by that amount. The gain or loss reflects the partial termination of the lease.

What about rent reductions?

A rent reduction agreed with the landlord that was not part of the original terms is a modification: the liability is remeasured at a revised rate and the asset adjusted. A reduction that arises from the original terms, such as a rent that falls with an index, is not a modification; the liability is remeasured at the original rate.

Common mistakes

  • Keeping the original discount rate after a modification, instead of a revised rate.
  • Treating the exercise of an existing option as a modification, or a new negotiated extension as a mere reassessment.
  • Recognising a gain on an extension: increases in scope never give a gain.

How do lessors account for modifications?

For an operating lease, the lessor treats the modification as a new lease from its effective date, spreading any prepaid or accrued rent over the new term. For a finance lease, it applies IFRS 9 or treats the modified lease as a new lease, depending on whether the lease would have been an operating lease had the modified terms applied from the start. See lessor accounting.

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Questions people ask

What is a lease modification under IFRS 16?

A change in the scope or consideration of a lease that was not part of its original terms.

When is a lease modification a separate lease?

When it adds the right to use more assets and the price increases by an amount commensurate with their stand-alone price.

What discount rate is used when a lease is modified?

A revised rate at the modification date.

How is a lease extension accounted for?

The lessee remeasures the liability at the revised rate and adjusts the right-of-use asset by the same amount, with no gain or loss.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 16 Leases

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 16IFRS 16 lessee accounting step by stepIFRS 16The IFRS 16 discount rate: incremental borrowing rateIFRS 16Lease term, extension and termination options under IFRS 16

More in IFRS 16

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This guide is general information. It is not tax or legal advice for your situation.